Corporate Tax Debate Ignores Mid-Sized Businesses

Congress seems poised to lower the corporate tax rate, but lawmakers have so far largely ignored the mid-sized businesses that are actually the main drivers of job creation.

Joe Adams, CEO of the consulting firm McGladrey LLP, told The Daily Caller News Foundation on Monday that while efforts to ensure that reduced corporate rates do not exclude small businesses are commendable, similar protections are also needed for the middle market, generally defined as companies with annual revenues between $10 million and $1 billion.

“While the current bipartisan agreement over the need to lower the corporate tax rate is a refreshing and welcome change to the tax policy dialogue in Washington,” Adams said. “It reflects an obsolete ‘big or small’ view of business that ignores America’s most prolific job creators – the middle market.”

Mid-sized businesses also served as “our economy’s secret weapon” during the recent recession, Adams claimed, over the course of which they “added more than two million jobs, while their large counterparts cut four million positions.”

“The vast majority of middle market firms, like small businesses, are organized as pass-through entities (and thus have their earnings taxed through the individual filings of their owners and partners),” Adams explained. As a result, simply reducing the corporate tax rate would primarily benefit large corporations and not the small- and medium-sized businesses that together account for a much greater share of employment and GDP.

As part of the “fiscal cliff” deal (the American Taxpayer Relief Act of 2012), Congress sought to address that loophole by introducing a new top individual tax bracket of $450,000, which was designed to shield small-business owners from increased taxes on the highest-earners.

“While the majority of owners and partners at the nation’s smallest businesses likely fall below that threshold,” Adams told The DCNF. “Middle market filers are far more likely to fall above it.”

In a 2014 survey of more than 500 middle market executives, McGladrey found that recent tax changes, including the fiscal cliff deal and Obamacare, “were leading many companies to slow down or cut back in key areas,” including nearly every company organized as a pass-through entity.(RELATED: Obama Says His Corporate Tax Plan is Based on GOP Ideas)

In addition, most managers who cut their workforces in 2013 “attributed those cutback decisions, at least in part, to tax increases they’ve seen as part of the fiscal cliff deal,” which Adams considers “compelling evidence that the law’s protective threshold was too low to shield middle market businesses.”

Although current efforts to reform the corporate tax code do not seem likely to include hikes to the individual tax rate, Adams said, even “the much-discussed ‘corporate only’ approach to reform that simply lowers the corporate tax rate” could end up shifting more of the corporate tax burden onto the shoulders of mid-sized businesses.

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